Breaking Up is Hard to Do: Terminating an Employee in China (Part 2)

Heightened pressure in China’s labor market means that employers are commonly required to terminate employees to optimize their business operations. Legally speaking, however, this is by no means an easy thing to do, especially under the comparatively stringent regulations on terminating employment contracts since 2008. In Part 2 of this two-part article, we detail the calculation of severance payments in China and provide our practical advice for terminating employees in China.

Severance payments

The formula to calculate a severance payment is as follows:

Severance payment = One month’s salary × Years of service

Here, ‘one month’s salary’ is calculated by taking the average monthly salary earned by the employee over the previous twelve months. However, following the enactment of the new Labor Contract Law on January 1, 2008, severance payments are capped at three times the average monthly salary in the given location. Note: this only applies where the terminated employee’s salary exceeds three times the average local salary, and does not apply to employment prior to January 1, 2008.

However, following the enactment of the new Labor Contract Law on January 1, 2008, severance payments are capped …

For example, in Shanghai, the average local monthly salary in 2012 was RMB 5,036 (* 3 = RMB 15,108). Thus, an employee whose employment was lawfully terminated in Shanghai could only receive up to RMB 15,108 as severance for each year of employment after January 1, 2008.

An employment period of between six months and one year is counted as one year. The employee is entitled to a severance payment of one month’s salary.

An employment period shorter than six months is counted as half a year. The employee is entitled to a severance payment of half a month’s salary.

For example, an employee who has worked for 13 months for the same company will be seen as having worked one year and one month when calculating his/her severance payment. For the 12 months, he/she will receive a severance payment of one month’s salary; the remaining one month will be regarded as half a year and the employee will be entitled to half a month’s salary in severance payment. So in total, the severance payment will be one and a half months’ salary.

Practical guidance

Step 1. Determine whether the termination is an early termination or not. If the employment contract is a first fixed-term contract that has expired and the employer chooses not to extend it, the employer will need to make a statutory severance payment. If the employer chooses to terminate the employer prior to the expiration of the first fixed-term contract, this is considered ‘early termination’ and certain conditions must be fulfilled.

Step 2. In case of early termination, try to come to a termination agreement with your employee, negotiating the termination date, severance payment and any other necessary details. This is often the safer option even if there are grounds for unilateral termination. If an employer unilaterally terminates an employee before the employment contract has expired, the case may end up in court, and the judge may hold that there were insufficient grounds for unilateral termination. If you come to an agreement with an employee, he or she is less likely to take the matter to court. If the case does end up in court, the judge will then look at the validity of the termination agreement, not the termination itself.

Step 3. If you and your employee cannot come to an agreement on termination, consider whether there are grounds to support the immediate termination for cause or the 30-day notice termination without cause. Do however keep in mind the statutory obstacles to such a termination.Under these circumstances, you should also give the labor union advance notice. If the labor union believes the termination to be unjustified, it will put forward its opinion. If the termination violates laws, administrative statutes or the employment contract, the labor union has the right to demand that the employer rectify the matter. The employer will then need to study the labor union’s opinions and notify the union in writing as to the outcome of the matter.

If none of the above measures can be adopted, then the termination is likely to be considered an unlawful termination.

Dezan Shira & Associates is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in emerging Asia. Since its establishment in 1992, the firm has grown into one of Asia’s most versatile full-service consultancies with operational offices across China, Hong Kong, India, Singapore and Vietnam as well as liaison offices in Italy and the United States.

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